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EX-99.1 - EXHIBIT 99.1 - CAPITAL SOUTHWEST CORP | ex99_1.htm |
8-K - CAPITAL SOUTHWEST CORPORATION 8-K 2-8-2016 - CAPITAL SOUTHWEST CORP | form8k.htm |
Exhibit 99.2
Capital Southwest CorporationQ3 2016 Earnings Presentation 5400 Lyndon B. Johnson Freeway, Suite 1300 | Dallas, Texas 75240 | 972.233.8242 | capitalsouthwest.com February 8, 2016
This presentation contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995 relating to, among other things the business, financial condition and results of operations of Capital Southwest, the anticipated investment strategies and investments of Capital Southwest, and future market demand. Any statements preceded or followed by or that include the words "believe," "expect," "intend," "plan," "should" or similar words, phrases or expressions or the negative thereof, or any other statements that are not historical statements are forward-looking statements. These statements are made on the basis of the current beliefs, expectations and assumptions of the management of Capital Southwest. There are a number of risks and uncertainties that could cause Capital Southwest’s actual results to differ materially from the forward-looking statements included in this presentation. In light of these risks, uncertainties, assumptions, and other factors inherent in forward-looking statements, actual results may differ materially from those discussed in this presentation. Other unknown or unpredictable factors could also have a material adverse effect on Capital Southwest’s actual future results, performance, or achievements. For a further discussion of these and other risks and uncertainties applicable to Capital Southwest and its business, see Capital Southwest’s Annual Report on Form 10-K for the fiscal year ended March 31, 2015 and its subsequent filings with the Securities and Exchange Commission. As a result of the foregoing, readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this presentation. Capital Southwest does not assume any obligation revise or to update these forward-looking statements to reflect any new information, subsequent events or circumstances, or otherwise, except as may be required by law. Forward-Looking Statements
Bowen S. DiehlChief Executive Officer and PresidentMichael S. SarnerChief Financial OfficerDouglas M. KelleyManaging DirectorChris RehbergerVP Finance Conference Call Participants
CSWC has refocused its investment strategy to become a lender to middle-market companies across the capital structureCSWC was formed in 1961, and became a BDC in 1988Publicly-traded on Nasdaq under CSWC tickerInternally-managed BDC with RIC status for tax purposesManagement transition over the last two years has resulted in a new Chairman, CEO, CFO, and credit teamIn December 2014, announced split into two separate companies with spin-off of industrial growth company (“CSW Industrials”; Nasdaq: CSWI) which was completed September 30th, 2015Over the past 18 months, CSWC has made significant strides towards rotating its investment portfolio from equity to credit CSWC Company Overview
Investment strategy designed with the end game in mind….Build a BDC portfolio that pays shareholders attractive sustainable dividends, funded from investment incomeAchieve granularity and diversity across asset classesEstablish balance between liquid and illiquid asset classesMaintain capital preservation as first priorityDemonstrate consistent NAV per share growth Match of fixed/floating rates with financing sources Asset Allocation & Investment Strategy
Support the acquisition and growth of companies in the Lower Middle Market Companies range from $3 to $20 million in EBITDATarget leverage of 2x – 4x Debt to EBITDA Commitment size up to $20 million with hold sizes of $5 MM to $15 MMOriginate both Sponsored and Non-sponsored debt investments across the capital structure, including first lien, unitranche, second lien and subordinated debtNon-control equity co-investments alongside debt investments Participate in First and Second Lien debt investments in the Upper Middle MarketCompanies typically have in excess of $50 MM in EBITDATarget leverage of 3x – 5.5x Debt to EBITDA Hold sizes of $5 MM to $7 MMFloating Rate debt securitiesMore liquid assets relative to Lower Middle Market investmentsCreates ability to invest/divest opportunistically based on market conditions and liquidity position Investment Focus
Maintaining Strict Investment Criteria Experienced Management Team with Meaningful Equity Ownership Relevant experience and track record of successSignificant economic interest in the future success of the company Strong Competitive Position Sustainable Business Model Diversification of Customers and Suppliers Ability of Capital Structure to Sustain Economic Cycles Significant Equity Value Supporting Debt Market leader in its business segmentsQuantifiable competitive advantage versus their competitors with barriers to entry Differentiated product and/or service that gives company a sustainable reason to existConsistent cash flow with ability to maintain margins Inability for any one customer to significantly affect the company’s financial performance and ability to service debtSustainability of supply and cost of inputs Capital structure appropriate for business model and industryDownside scenario modeling proves ability to sustain economic cycles while servicing debt with leverage inside enterprise value Underlying equity value sufficient to support debt in case of idiosyncratic business risks or economic cycles
Portfolio Rotation Focused on Credit 6/30/2014 (excl. CSWI Companies) 12/31/2015 Investable Assets Since June 2014, CSWC has made significant strides towards rotating its investment assets from equity to creditExited 21 portfolio companies for $222 MM in proceedsInvested $61 MM in 12 middle-market credit investmentsInvested $84 MM in 19 credits within I-45 Senior Loan Fund (“I-45”), a joint venture with Main Street CapitalBelow is a depiction of the asset rotation of the CSWC portfolio, excluding the businesses that were spun-off as CSW Industrials
Q3 2016 and Post-Quarter End Originations In Thousands Q3 2016 Portfolio Originations Name Industry Type Market Segment Par Value Yield Three Sixty Group Consumer Products & Retail 1st Lien Upper Middle Market $7,000 L + 9.0% (1% Floor) Argon Medical Devices Healthcare Products 2nd Lien Upper Middle Market $5,000 L + 9.5% (1% Floor) Water PIK Consumer Products & Retail 2nd Lien Upper Middle Market $4,781 L + 8.75% (1% Floor) Prepaid Legal Services Consumer Services 2nd Lien Upper Middle Market $1,750 L + 9.0% (1.25% Floor) Total $18,531 Portfolio Originations - Since Quarter End Name Industry Type Market Segment Principal Amount Yield Chandler Signs Services: Business Secured Subordinated Debt Lower Middle Market $4,500 12% Fixed Chandler Signs Services: Business Equity Lower Middle Market $1,500 N/A Tax Act / HD Vest Financial Services 1st Lien Upper Middle Market $5,000 L + 6.0% (1% Floor) Digital River Software & IT Services 1st Lien Upper Middle Market $4,632 L + 6.0% (1% Floor) Total $15,632
Portfolio Mix as of 12/31/15 at Fair Value By Investment Type By Industry Continuing to build a diverse investment portfolio
I-45 Senior Loan Fund Portfolio Detail By Investment Type By Industry I-45 Portfolio Statistics Total Principal Outstanding $83,689 Number of Issuers 19 Avg. Investment Size as a % of Portfolio 5.26% Wtd. Avg. Leverage of Investments 3.3x Wtd. Avg. Yield to Maturity 7.59% Wtd. Avg. Duration (Years) 4.5 Invested $28.8 MM of our $68 MM commitment in I-45 SLF
Financial HighlightsQ3 2016 Net Investment Loss of ($20 K) or ($0.00) per weighted average shareNet Investment Income of $0.7 MM or $.04 per weighted average share excluding spin-off related expensesGrew investment portfolio to $135 MM from $93 MM Positive cash flow from operations excluding spin-off expensesNo non-accruals or watch list companies within debt investment portfolio$144 MM in cash available for investment activityKey UpdatesImplemented $10 MM Share Repurchase PlanRamp of I-45 Senior Loan Fund ahead of plan due to opportunistic secondary purchases during the quarter $88 MM total assets, predominantly in first lien investments Raised $75 MM on Deutsche Bank Credit Facility (accordion up to 2x debt to equity) I-45 produced a dividend to CSWC of $265 K in first quarter of operations Q3 2016 Highlights
Key Highlights 1 NAV reduction attributed to $2.9 MM tax payment on behalf of shareholders and $1.1 MM of net portfolio depreciation.2 CSWC utilizes an internal 1 - 4 investment rating system in which 1 represents material outperformance and 4 represents material underperformance. All new investments are initially set to 2.3 Excludes CSWC equity investment in I-45 Senior Loan Fund Quarter Ended 9/30/2015 Quarter Ended 12/31/2015 Financial Highlights Net Investment Loss Per Share ($0.60) ($0.00) NAV Per Share1 $17.68 $17.22 Cash & Cash Equivalents $184,111 $143,680 Debt to Equity 0.0x 0.0x Shares Outstanding 15,583 15,725 Weighted Average Shares Outstanding (Diluted) 15,680 15,751 Portfolio Statistics Fair Value of Debt Investments $45,115 $60,929 Average Debt Investment Hold Size $5,013 $5,077 Fair Value of Debt Investments as a % of Cost 100% 100% % of Debt Portfolio on Non-Accrual (at Fair Value) 0.3% 0.0% Weighted Average Investment Rating2 N/A 2.0 Weighted Average Yield on Debt Investments 10.11% 10.31% Total Fair Value of Investments $93,339 $134,935 Weighted Average Yield on all Investments 4.83% 11.28% Investment Mix (Debt vs. Equity)3 47% / 53% 57% / 43% Investment Mix (Yielding vs. Non-Yielding) 80% / 20% 89% / 11%
Balance Sheet Highlights (In Thousands, except per share amounts) Quarter Ended 9/30/2015 Quarter Ended 12/31/2015 Assets Portfolio Investments $93,339 $134,935 Cash & Cash Equivalents $184,111 $143,680 Other Assets $8,200 $7,965 Total Assets $285,650 $286,580 Liabilities Payable for Unsettled Transaction $0 $4,850 Income Tax Payable $0 $2,948 Other Liabilities $10,059 $7,997 Total Liabilities $10,059 $15,795 Shareholders Equity Net Asset Value $275,591 $270,785 Shares Outstanding at Period End 15,583 15,725 NAV per Share $17.68 $17.22 Debt to Equity 0.0x 0.0x
Income Statement Highlights (In Thousands, except per share amounts) Quarter Ended 9/30/2015 Quarter Ended 12/31/2015 Investment Income Interest Income $945 $1,415 Dividend Income $0 $1,612 Fees and Other Income $133 $280 Total Investment Income $1,078 $3,307 Expenses Cash Compensation $3,411 $1,675 Share Based Compensation $370 $195 General & Administrative $1,070 $1,354 Spin-off Related Expenses $5,474 $710 Total Expenses $10,325 $3,934 Income Tax Benefit (Loss) ($88) $607 Net Investment Loss ($9,335) ($20) Gain / (Loss) Net realized gain (losses) on investments ($3,396) ($8,170) Net increase (decrease) in unrealized appreciation of investments $3,783 $7,060 Net increase (decrease) in net assets resulting from operations ($8,948) ($1,130) Weighted Average Shares Outstanding 15,680 15,751 Net Investment Income Per Weighted Average Share ($0.60) ($0.00)
Investment Income Detail Constructing a portfolio of investments with recurring cash yield (In Thousands) Quarter Ended 9/30/2015 Quarter Ended 12/31/2015 Investment Income Breakdown Cash Interest $930 $1,392 Amortization of purchase discounts and fees $15 $23 Cash Dividends $0 $1,612 Management Fees $133 $275 Other Income (non-recurring) $0 $5 Total Investment Income $1,078 $3,307 Key Metrics Cash Income as a % of Investment Income 98.6% 99.3% % of Total Investment Income that is Recurring 100.0% 99.8%
Interest Rate Sensitivity Debt Portfolio Composition Impact of Base Rate Changes on Net Investment Income Note: Illustrative change in NII is based on a projection of our existing debt investments as of 12/31/15, adjusted only for changes in Base Rates. The I-45 Senior Loan Fund is comprised of 100% floating rate assets and liabilities. Change in Base Interest Rates Illustrative NII Change ($'s) Illustrative NII Change (Per Share) 50 bps ($34,814) ($0.00) 100bps $333,308 $0.02 150bps $732,988 $0.05 200bps $1,132,667 $0.07
Corporate Information Board of Directors Senior Management Fiscal Year End Inside Directors March 31 Joseph B. Armes Bowen S. Diehl Bowen S. Diehl President & Chief Executive Officer Independent Auditor Grant Thornton Dallas, TX Independent Directors Michael S. Sarner John H. Wilson Chief Financial Officer, Secretary & Treasurer William R. Thomas T. Duane Morgan Corporate Counsel David R. Brooks Investor Relations Thompson & Knight / Jones Day Dallas, TX Jack D. Furst Michael S. Sarner Capital Southwest Corporate Offices & Website 214-884-3829 5400 LBJ Freeway msarner@capitalsouthwest.com Transfer Agent 13th Floor American Stock Transfer & Trust Company, LLC Dallas, TX 75240 Securities Listing 800-937-5449 http://www.capitalsouthwest.com NASDAQ: CSWC www.amstock.com